The Importance of an Exit Strategy

What is an Exit Strategy?

An exit strategy is the plan you have in place to repay your bridging loan when the time comes to repay it.

Bridging loans are designed to be a short-term funding solution and although they are very useful when needed, they can be a lot more expensive than longer term debt. It’s crucial that you’re able to repay, especially if you’re rolling up interest that you wouldn’t otherwise be able to afford to pay.

Why is an Exit Strategy Important?

When you hit the end of the term, you are expected to repay the loan in full. If you’re unable to do this, your account will be placed in default. To avoid this situation affecting your credit file, you will have to resolve the situation quickly. Your options are:

Extend the Loan with Your Current Lender: Consider that you may not be able to continue to roll up interest, if you’re near your maximum loan to value. In addition, the lender may refuse to renew the loan, or may charge a higher interest rate for doing so.

Refinance to a New Lender: This could well get expensive as you would have to pay all setup costs again. Even if you manage to refinance your bridging loan, you still need to consider your exit. By blindly refinancing, you may just be delaying the inevitable.

If you’re unable to repay your loan and you run out of options, the lender can repossess the property, which could end up with significant financial loss and significant damage to your credit history.

What Exit Strategies Can I Use?

Lenders will often consider several exit strategies, the main ones being:

Sale of the primary property

Sale of other investments

Refinance to a longer-term mortgage

Sale of a secondary property

Inheritance

Sale of shares

How Do I Know if it Will Work?

It’s important to consider your exit strategy against the timescale you have available. It is better to borrow for longer than you need to, than to run out of time. Most bridging loan lenders won’t charge you an early repayment fee if you repay the funds early.

If you are looking to sell property, shares or other investments, consider the liquidity of the market and the likely timescales for a transaction being completed.

Property sales, in particular, can take longer than expected. Be aware of the risk of buyers dropping out, taking a long time to complete and failing their finance applications. Buyers don’t tend to be too sympathetic to the situation and will take their time if it suits them.

If you’re looking to refinance, ensure your application will fit criteria by talking the situation through with an independent broker and if possible, also try to get a full agreement in principle from the lender you would like to use.

It is important to understand how many options you have available, if there is only one lender who is willing to refinance you, the situation is far higher risk than it would be if there were 10 options.

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ABC Finance Limited is authorised and regulated by the Financial Conduct Authority Registration No. 304671. The Financial Conduct Authority does not regulate all of our products. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up the repayments on a mortgage or any debt secured on it. If you consider consolidating existing loans or unsecured debt you need to be aware that if you extend the term of the debt you may be increasing the total amount that you repay. The Information in this website is subject to UK regulatory regime and is restricted to UK consumers. However, there may be links to third party sites which may or may not have these same restrictions.